Inflation in the Cost of Corruption

by Wolf Richter • Mar 16, 2012 • Comments Off on Inflation in the Cost of Corruption

Inflation has pervaded every aspect of our lives, from skyrocketing gasoline to rents to well, corruption. But inflationary pressures in corruption are notoriously difficult to measure. Changes in price levels of under-the-table payments escape even the sharp eye of the Bureau of Labor Statistics—responsible for the CPI—and similar agencies around the world, and so they don’t include corruption in their indices. But in Germany, which is historically paranoid, and rightfully so, about inflation, having experienced two wipe-outs within one generation, there has been progress: inflation in the cost of corruption can now be estimated.

Turns out, a confounding new study by Friedrich Schneider, an economics professor and corruption researcher at the Johannes Kepler University in Linz, Austria, determined that corruption in Germany would cost the economy €250 billion ($325 billion) in 2012. In 2005, that amount was €220 billion ($286 billion). An increase of 13.6% over seven years.

Corruption is a matter of definition. In this case, it is limited to bribery of civil servants and does not include politicians. They’re in a different class. For example, Christian Wulff, when he was President of Germany, got entangled in revelations last year that he accepted all sorts of favors from affluent benefactors over many years. His faux-pas included threatening the media—well, the tabloid BILD—when he learned that it would publish some new details. And he left his threats as a voice mail. Corrupt doesn’t mean smart.

But he was a top politician in Chancellor Angela Merkel’s government. And she owed him. In 2005, when he was Premier of Lower Saxony, he announced that he wouldn’t run for the CDU’s nomination for Chancellor; instead, he supported Merkel, then the CDU leader in parliament (Bundestag). So she became Chancellor, and in 2010 he became President. In return, when sunshine hit his activities, she supported him. Popular outrage finally induced him to resign, but instead of being prosecuted, he was awarded an ironically-called Ehrensold (honor pay) of €199,000 ($260,000) per year for life, plus other perks.

And Germany is one of the least corrupt nations on earth! According to the Corruption Perception Index published annually by Transparency International, Germany and Japan are tied for 14th place. New Zealand is at the top, the US in 24th place—the index measures bribery of civil servants, not lobbying, campaign finance, corporate-government backscratching, Fed money handouts…. oops.

Just behind Germany and Japan is another practically corruption-free country, Austria, where Ewald Nowotny, governor of the Austrian National Bank, is up to his neck in an international criminal scandal. And he is still in his job.

Even the mere bribery of civil servants, Herr Professor Schneider estimates, will cost Germany €250 billion this year. The economic damage comes from the effects when the best offers are bypassed in favor of inferior ones, which curtails investment and stifles growth. He proposes a solution: better pay for civil servants or stricter laws with more severe punishment, or both.

But anti-corruption laws are having trouble getting through the Bundestag. In 2003, Germany signed the United Nations Convention against Corruption, but unlike all other industrialized nations, it never ratified and implemented it, which puts Germany in the company of such illustrious nations as Sudan and Somalia. Of course, China, Gaddafi’s Libya, Russia, and Pakistan ratified the Convention, and they’re among the most corrupt nations in the world. Changing a few laws isn’t going to stop corruption.

This bubbled up again in January when the Wulff scandal was white hot. The opposition SPD proposed to adapt German criminal law to the Convention, making certain acts by members of parliament punishable with up to five years in the hoosegow. But Merkel’s CDU nipped that in the bud.

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.